IFR India Offshore Financing Roundtable 2014: Part 3

IFR: Of course, the fact that the DR landscape is in the process of being liberalised won’t of itself drive ECM activity. There have to be other drivers. But there have been a host of these emerging recently, whether it’s Indian state companies having to increase their free float, the mooted increase in the FDI cap on the insurance sector, the creation of REITs and infrastructure investment trusts, and of course, the Sensex and the Nifty 50 are very strong. How is the overall India ECM picture looking?

Bharat Reddy, JP Morgan: On the insurance side, the government did propose an increase in foreign direct investment limits on insurance, but political differences haven’t permitted that to be implemented so far, but it’s a positive development.

I think we’re at a seminal point in Indian political history. For the first time in over 30 years, you have a government at the centre which has a simple, stable majority. This hasn’t happened in a lifetime. I think this government will take significant decisions to enhance economic recovery. They’ve just earlier today completed 100 days in government, and the GDP growth number is 5.6% as opposed to 4.2% which is a significant uptake in a matter of 100-odd days.

I think there’s a feelgood sentiment in corporate India. If you open your newspaper every morning you will see that the local bourses are at new, all-time record highs. So clearly investor interest, particularly internationally from foreign institutional investors and from domestic institutions seems to be picking up.

How will this address or impact depositary receipt issuance? There’s no taking away from the fact which Neil mentioned that SEBI has made registration of foreign institutional investors onshore in India far simpler over the last several years, and there are many more of them who enter this market directly. Single listed depositary receipts, which is also one of the proposals, where an unlisted company can choose which market to do its maiden listing on, is going to make a significant difference to depositary receipt issuance.

Why should the government sit in judgement and say that a pharmaceutical company or a technology company has to list in India first and only then can it raise depositary receipts? Single listed depositary receipts have been very prominent in China and the technology sector for many years, and in certain sectors the Swiss Exchange provides, in my view at least, healthy valuations to sectors like pharmaceuticals, biotechnology, and certain specialised automotive tools.

So an Indian manufacturer should be in a position to do his maiden listing on one of these international bourses. Similarly for technology and media, the United States is clearly a leader. The investors in these markets understand that space much better and the pools of capital available to invest directly in locally denominated stocks are significantly greater than what find their way into India.

Along with Level 1’s, a number of these measures will significantly enhance the issuance of depositary receipts out of India over the next few years.

IFR: Neil, where will activity come from? Will it be the big well-known brand name companies in India, will it be mid-market?

Neil Atkinson, BNY Mellon: Most of the demand we’ve seen or heard of over time tends to be for blue-chip Indian corporates. There are only 10 or 11 Indian companies listed in the US in ADR form, for example. The MSCI Emerging Markets Index has over 70 constituents from India, so that’s the portion that investors are looking for.

There’s a big market in the US, a trillion dollar market, which is the separately-managed accounts industry, high net worth individuals who are looking to mirror institutional portfolios, and they need to invest in a US. dollar denominated security. Again, they’re not looking towards micro-caps, small-cap Indian issuers, but they’re looking towards blue chips that can match an index or match a portfolio of the institution.

IFR: Marco, Bharat did you a bit of good turn by mentioning some of the benefits of the Swiss Exchange. In terms of how you market your credentials, is the profile of your existing listed base at the back of how you think about the world in terms of what you can offer as an exchange? We live in a horses-for-courses world, so if Switzerland offers good life-sciences, good pharma liquidity and valuations etc, does that dictate how you articulate your story?

Marco Estermann, SIX Swiss Exchange: Yes, absolutely. We’re not here in corporate India to attract any kind of company, but at the end of the day if a company is looking to list on one of the exchanges, be it SIX Swiss Exchange, be it London, NASDAQ, Singapore, they’re looking to list there for specific reasons, and one of them is definitely investor interest.

In Switzerland, there is a tradition in the life-sciences area, we do have large companies: Novartis, Roche, global leaders in their respective spaces. Around these companies, some clusters have developed. It’s not just these large companies, it’s also the analysts, the media; they understand the life-science investment case.

You do have a large peer group on the exchange but also on the private side. You do have co-operation with academia, this is why a lot of Indian companies have R&D structures, IP structures in Switzerland. Indian life-sciences companies have realised that there is a strong cluster, and obviously also investors understand the segment.

We have other sectors like specialty chemicals. automotive suppliers, consumer goods, industrial, industrial engineering companies. A company, no matter where it comes from and what kind of market it looks at, should have a business reason to list in that specific area whether it’s DR or any other kind of security. They should do it in a market where investors understand the company and the investment case. Therefore, the probability will be higher for that company to achieve a fair evaluation in that specific market.

IFR: In terms of how you see the drivers of Indian equity activity, I mentioned a few random things. What do you see as the top couple of themes that you think are going to drive issuance out of India?

Marco Estermann, SIX Swiss Exchange: Looking at our specific situation in Switzerland, what we have seen is the establishment of large Indian corporates or medium-sized Indian corporates. They have established a structure, be it in Switzerland, be it in Europe, they started as either R&D or sales offices. They have developed over the last, say, five to 10 years and are now becoming self-sufficient and at the same time the corporate, the parent company in India, realised that one company, be it in Europe or specifically in Switzerland, could be used to finance international growth.

They have achieved levels of size and so on that would make them interesting IPO and listing candidates. It could be that they’re not necessarily going down the DR route but they’re looking to list the European subsidiary. Other companies might use the DR route to increase visibility in the European context with European investors, and that visibility would also help them to sell their products, to market their products, not only shares or DRs to investors but also their basic products to new customers.

IFR: Thanks. Neil, we talked about DRs in an equity context. Again, the Committee report mentions, it’s not just equity, it’s debt. Is there a conversation to be had about debt DRs or is that a bit down the road? I’m thinking about the ease with which Indian companies can raise the international debt. Are we going to get a debt DR market?

Neil Atkinson, BNY Mellon: Globally in certain countries we already have a debt DR market, either referred to as ‘global depositary notes’ or ‘fixed income DRs’. Certainly that’s something that is worthwhile having a discussion about as well. Again, simplicity of access to the market for investors is key.

IFR: Most of the GDNs have been for emerging market type places, so Nigeria?

Neil Atkinson, BNY Mellon: They are places like Panama and such like, yes.

IFR: Bharat, can you speak to that question as well, because I am quite taken with this notion of debt DRs, but I’m curious to understand the driver of debt DR.

Bharat Reddy, JP Morgan: It is quite novel. I think Mr Sahoo, if I’ve interpreted the report correctly, is looking at any underlying security, whether it is a debt instrument, a mutual fund, a unit, or an exchange-traded fund, to be an underlying security for the issuance of a depositary receipt. However, speaking practically, this has to be in consonance with the foreign institution investor limits in government securities.

Specifically in government securities, the limit has been increased steadily over the last couple of years, but the limit gets filled up almost instantaneously. On the other hand, corporate debt is still way below par in terms of international ratings, in terms of even local investor appetite in Rupee paper.

The challenge will be to ensure that government securities, if they start being issued in DR form, can find an attractive and liquid market in the context of overall FII limits. For domestic Indian corporates, debt DRs would be uncharted territory and will have to be seen in the context of investor appetite.

IFR: Mr Sahoo, can you talk to what you were envisaging when you proposed debt and other instruments underlying DRs, bearing in mind existing External Commercial Borrowing regulations. We have seen quite a lot of Indian debt issuance in international markets and we increasingly see a vibrant domestic rupee bond market which is perhaps not as patronised by international investors as India would like, but nevertheless these channels do exist. Where do you think debt DRs make a difference?

M.S. Sahoo: The terms of reference of the Sahoo Committee include revisiting External Commercial Borrowing. We’ve so far finished the ADR and the IDR parts; we’re now working on ECB. I’m not in a position to tell you what will be the shape of things to come in that part.

We have, however, recommended in the ADR report that if foreign institutional investors are allowed to invest up to US$30bn in Indian government securities, let there be depositary receipts on government debt. The framework we have proposed is a very flexible one. We are saying, allow depositary receipts on permissible securities; the base is securities accessible to Indian investors.

You can add or remove instruments to /from the list of permissible securities depending on policy stance on the capital account; it will not make any difference. Further, it’s not that a market has to be there on all kinds of permissible securities. We are only creating options; we are removing only the irritations, the bottlenecks. From the perspective of government policy, we have no preference for one over another; we are not promoting or discouraging anything. Let every option be available and let the market choose. It’s not that there has to be DR on all securities we are recommending.

On the issue of exchange listing, it does not hold much significance for us. As we all know, exchanges come in different hues and colours and they have different segments for specific needs. We have gone beyond that. We are saying that not only can an unlisted company from India issue DRs, we are saying also that these DRs need not be listed at all at home or abroad. These can be OTC.

We have one million companies in this country and only 4,000-5,000 are listed. We also know that many unlisted companies have gone abroad and have been able to raise DRs on exchanges and OTC. Theoretically, in a capital market, there is a market for every product. I think there’s enough scope for Indian companies, even those that don’t meet the requirements of the Indian market, to meet the requirements of some other market.

To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3 - Part 4